Does a HELOC Affect Your Credit Score?

In terms of your credit score, your HELOC or home equity line of credit has a lot in common with credit cards. It may not have much impact on your credit score once you apply for one, but a bigger one if the payments are missed or late.

HELOCs revolve around credit lines, which are secured by your home’s equity. One of the reasons why homeowners take out a HELOC is to utilize the money to make home renovations, pay down interest debts like credit cards, or cover unexpected expenses.

The primary benefit of HELOC is that it has lower interest rates compared to plastic. In late October, the rate on HELOC was 4.52% in comparison to 16.02% for credit cards.

A HELOC may affect your credit score in various ways, from application to repayment. But, such effects might be temporary.

Any kind of credit you use may impact your credit score. Once you take out HELOC, you’ll extend how much available credit you currently have. Once you open the line and you won’t use any credit, the rate of your credit utilization will be enhanced that might also boost your credit score. If you make a timely payment on the credit you borrow from the equity line, such positives can be reported on the credit history.

On the contrary, once you take out a big part of your equity line, you’ll have a high credit utilization rate that may affect your score. Failing to make payments in a timely manner might reduce your score. Since the rates of HELOC can be variable, you should plan for the fluctuating payment needs to avoid this problem.

Should You Get HELOCs?

If you require a lump sum of money and you’ve built a chunk of equity in your home, a HELOC might be a great option for you. It may be for a car purchase, home renovation, big medical bills, and funding college classes for your kid or yourself.

The largest risk is that a HELOC may feel like easy money. Generally, you only have to make an interest payment during the draw period. That is why it’s tempting to utilize more of your line of credit. When your repayment period starts, you’ll just be stuck with a huge debt to repay.

It’s also crucial to note that HELOC is typically a variable-rate line of credit. It means that your interest rates would change over time, which might make it difficult to budget to repay the amount you borrow. For individuals who want a clear-cut plan to remove debts, a HELOC isn’t a great option.

With that in mind, HELOC can be a nice option if you don’t use more credit lines that you’ll be able to repay. You can get better interest rates than you can from credit cards and the credit score-HELOC connection means that you won’t need to think about your credit utilization ratio, HELOC is a great option than credit cards. So, make sure to weigh things out when considering HELOC, especially if you want to maintain a good credit score.